Never in the field of political conflict has so much been owed by so many to so few. So few, in fact, we can name him: Angus Taylor, Liberal Member for Hume.

In a run of posts this week, STT will detail the fallout from Alan Finkel’s fantasyland review of Australia’s electricity market.

In a week when all guns were trained on Australia’s renewable energy debacle – retail power prices spiked 20% year-on-year, with worse to come and the AEMO warned of inevitable mass blackouts this summer (caused by inevitable wind power output collapses) – the Liberal/National Federal Coalition government collectively behaved like a barnyard duck that had been whacked firmly on the head with a shovel.

In what turned out to be a colourful and fiery party room meeting last Tuesday, the only member of the party with a seriously solid grip on just what a disaster Australia’s renewable energy policies have been – and just how destructive Finkel’s recommendations to ‘resolve’ its electricity market fiasco would be if ever implemented – was Angus Taylor.

Most of those who either oppose or have concerns with the clean energy target as modelled by Chief Scientist Alan Finkel are taking their cues from Assistant Minister for Cities, Angus Taylor, a businessman in his former life.

“I’d be surprised if Abbott has even read Finkel,” said one Liberal conservative.

“Angus knows all the tricks in the modelling, he got it right with the RET two years ago,” the Liberal says.

“People trust him. He’s pretty pragmatic. It offends him when he sees modelling designed to achieve an objective.”

During Tuesday night’s fiery party room meeting, Mr Taylor, one of the 20 MP who spoke negatively of the CET as modelled by Dr Finkel, described it as a car which needed the body, the engine everything else removed so it could be rebuilt from scratch

Mr Taylor believes in a CET but told the party room such a technology-agnostic scheme should have been implemented at the very beginning instead of a Renewable Energy Target.

Now, it is almost too late for a CET because no one will again build a gas or coal-fired power station because of high gas prices and the longer term political risks surrounding coal. Thus, a CET would be little more than another RET.

Mr Taylor believes a broader approach is needed to reduce emissions. He believes the lowest cost option is to allow the purchase of international carbon permits which cost as little as $2 each, and to continue the Coalition’s direct action policy. The Coalition previously flagged the purchase of these international permits as part of its post-2020 policy to help meet the Paris targets. These would have a much lower impact on power prices.

One source said, however, these permits were expected to increase substantially in price over the next decade as demand increased and supply dwindled.

In fact, total renewable energy output will fall short of the ultimate 2020 target by around 16,000 GWh, the result being that all Australian power consumers will be hit with the “shortfall charge”, an effective $93 per MWh penalty applied to all retail power bills, which between now and 2031, when the LRET expires, will add more than $20 billion to already spiralling retail power bills.

The level of uncertainty surrounding the LRET means that only the crazy brave will even consider investing in wind power from here on. Which, in turn, means that there is no way that the cost of the penalty charge will be avoided.

Now, as if that were not politically toxic enough, any effort to add intermittent and chaotic wind power generation to the grid will simply destroy the ability of the grid to function at all. So much has already played out in South Australia, which enjoys routine load shedding and statewide blackouts whenever its 1,698 MW of wind power capacity takes an unscheduled break.

Satisfying the current LRET means watching Queensland, New South Wales and Victoria follow South Australia on a path that inevitably leads to grid instability and power supply and pricing chaos; not satisfying the current LRET leads to the imposition of an unjustifiable Federal tax on retail power bills that will cost power consumers more than $20 billion.

Which brings us to Angus Taylor’s reference to “international carbon permits which cost as little as two dollars each” and the Coalition’s direct action policy.

Now, at the risk of upsetting true free marketeers (and STT is proudly one of those), true to its name STT has sound reasons for supporting the proposed carbon credit plan (as we detail below). Of course, in a world not run by politicians terrified of the next trend on Twitter, there would be no such thing as “climate policy”, in general or “carbon” trading schemes, in particular. Also for the record, when they refer to “carbon” we take them to mean CO2 gas, an odourless, colourless, naturally occurring beneficial trace gas essential to life on earth. Anyway, this is the logic behind the scheme, which we first reported on in August 2014.

While there are still plenty in the Coalition camp who think that the shortest route home is to simply scrap or cap the LRET, there are plenty of other ways of skinning the subsidy cat.

The plan is relatively simple: the LRET is replaced by Finkel’s CET. However, instead of satisfying the CET with certificates or credits issued to generators of designated ‘clean’ power, retailers (and others with obligations under the CET) would be able to satisfy their obligations under the CET by purchasing certificates or credits from a wide range of sources.

From our Canberra sources, it may be that the LRET legislation is left in tact, called a ‘CET’ and then gutted in such a way that the wind industry will be starved of subsidies by choking off the current and, more importantly, expected value of RECs.

The plan goes like this.

The Coalition already has a policy aimed at achieving least-cost CO2 abatement, called “Direct Action” (a run down on the policy is available here). The policy has its critics on other scores, but it may well end up being the wind industry’s Armageddon.

Under the Direct Action policy, CO2 abatement is to be achieved at the lowest possible cost using “Australian Carbon Credit Units” (CCUs).

CCUs would be issued on audited proof of the abatement of 1 tonne of CO2. That could be by way of “carbon farming”: planting trees or restoring vegetation cover to over-grazed pastoral range-lands, say.

RECs, on the other hand, are issued on proof of renewable power dispatched to the grid: 1 REC for each and every MWh delivered. The deal has proceeded on the (wild) assumption that 1 MWh of wind power dispatched to the grid results in 1 tonne of CO2 emissions reduction in the electricity sector.

Under the plan to adopt a CET, RECs would be made redundant and, instead, wind power generators would be entitled to apply for CCUs. RECs and CCUs would be consolidated, with the former being phased out, and eventually replaced by the latter.

Now, here’s the clever part.

A CCU would only be issued on audited proof that the applicant has, in fact, reduced or abated 1 tonne of CO2 emissions. That would see wind power outfits struggle to jump the first hurdle: despite some “smoke and mirrors” modelling, the wind industry has never produced a shred of evidence to back its CO2 abatement claims.

However, generators running efficient Combined Cycle Gas Turbines would be eligible for CCUs, on the basis that, by comparison with ageing coal-fired plant, CCGTs emit around 50% less CO2 per MWh dispatched to the grid. Accordingly, gas-fired CCGTs would receive an effective subsidy in the form of CCUs for the CO2 abatement attributable to a switch from coal to gas; thereby giving an incentive to invest in new and more efficient gas-fired plant.

The auditing of CCU applications would be done by way of certification and verification by a registered valuer. In the event that wind power outfits can satisfy the auditor and pocket a CCU, they then face the prospect of a far less generous subsidy stream.

(As an aside, one earlier variation of the plan was that the recipient of the CCU would not be able to cash it in, but would, rather, surrender the CCU to the Australian Tax Office and enjoy a reduction in their taxable income to the (pre-determined) value of the CCU: after auditing, the applicant would present their CCUs to a Certified Practicing Accountant to be submitted to the ATO with the applicant’s tax returns.)

The point of Direct Action and the CCU is to bring about the cheapest possible CO2 abatement, by whatever means. This means that the market for CCUs would be open to all comers and competitive in a way which the market for RECs isn’t.

The REC price is underpinned by the mandated shortfall charge of $65 per MWh: the effect of which has already come into play, with the spot price for RECs topping $90 last November – approaching the expected top of $93 – that figure equates to the full cost of the (non-tax-deductible) shortfall charge.

The CCU, however, is meant to be tradeable and interchangeable with carbon credits on international markets; such as those traded in Europe. Under Direct Action, certain CO2 emitters would be able to meet their obligations to surrender CCUs by purchasing European carbon credits at the going rate: the trading price of which is currently around €5 (A$7.30) and has generally traded between $8-12.

The price for CCUs is, therefore, expected to top out at around $12.

For wind power outfits to survive, let alone build any new capacity, they need RECs to be trading at around $40, at a minimum. Anything less than $30, and wind power generators will never cover their operating costs, which run between $25-30 per MWh (see our post here).

Under Direct Action (assuming audited proof that 1 tonne of CO2 emissions has been abated) wind power generators would be issued with 1 CCU (instead of 1 REC).

By replacing RECs with CCUs likely to trade around $12, the wind industry would disappear in a heartbeat.

The plan to replace RECs with CCUs was put together by energy market economist, Danny Price back in 2014; in essence a plan to rework the LRET to bring it into line with the Direct Action policy; starting with the plan to replace the REC system with CCUs (see our post here).

In substance, this is where Angus Taylor’s nod to $2 international carbon permits was directed. The political logic of it, no doubt, has fairly solid attraction to a government terrified of being branded “soft” on so-called “climate policy” by the rabid ‘green’-left; and equally terrified of recreating another South Australian power disaster in any other of the Australian states.

On the high plains of moral posturing and virtue signalling, the Coalition will be able to leave the current LRET target in tact (at least at face value), rebadge the LRET as the CET: allowing power retailers to obtain CCUs at a fraction of the cost of RECs and to surrender much cheaper CCUs to avoid the $93 cost of the shortfall charge. On that basis, the Coalition will rightly claim that its carbon credit trading scheme would lead to an effective decrease in power prices over the medium term. Moreover, because there would be no market for RECs, there would be no reason to add any more intermittent wind power capacity to the grid, thereby avoiding catastrophic blackouts of the kind that are dished up on a routine basis in South Australia.

Delivering power, whatever the time of day and whatever the weather, at prices that householders and businesses can afford is a guaranteed political winner.

In a Country with power prices rocketing 20% a year and a grid on the brink of collapse, doing nothing is not an option and for a government known to dither, political suicide.

Angus Taylor has emerged from their ranks as the only Coalition MP with the economic sense and political wit capable of solving Australia’s self-inflicted power market calamity. STT is very pleased to hear that it’s Angus calling the shots.

Comments

The federal and state governments, over the last decades, have so stuffed up the fossil-fueled generators that there is no chance that private industry will invest in it in the near term. They don’t trust the blighters!
The answer is for those same entities to finance the HELE and CCGT generators that are needed. After all, prior to the privation frenzy, the electricity generation and distribution systems were government built and owned.
As these governments caused the problem it is up to them to fix it and not keep passing the buck. The federal government has the major blame in this and should anti up most of the required cash.
The scheme mentioned above with CCUs sounds promising.

Modelling done by Angus Taylor on the economics of wind farms was made available by his former firm (before politics ) was included in objections to the Crudine wind farm some years ago – well before the reality hit South Australia. To the best of my knowledge he had the figures exactly correct. We would all do well to listen to Angus Taylor (Rhodes Scholar in economics).

I hope they kill the RET stone dead, It’s a total scam and waste of taxpayers money, we need coal power stations and nuclear if they can ever kick the braindead politicians into life to do the right thing